Market efficiency, managerial compensation, and real efficiency

Rajdeep Singh and Vijay Yerramilli

Journal of Corporate Finance, 2014, vol. 29, issue C, 561-578

Abstract: We examine how an exogenous improvement in market efficiency, which allows the stock market to obtain more precise information about the firm's intrinsic value, affects the shareholder–manager contracting problem, managerial incentives, and shareholder value. A key assumption in the model is that stock market investors do not observe the manager's pay-performance sensitivity ex ante. We show that an increase in market efficiency weakens managerial incentives by making the firm's stock price less sensitive to the firm's current performance. The impact on real efficiency and shareholder value varies depending on the composition of the firm's intrinsic value.

Keywords: Real efficiency; Market efficiency; Pay-performance sensitivity (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:29:y:2014:i:c:p:561-578

DOI: 10.1016/j.jcorpfin.2014.03.006

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